November 27, 2015

Carl Atkin Director Terravost Limited

There has been a notable change in the type of investors purchasing farmland in Central and Eastern Europe (CEE) since investment commenced in the early 1990s. Initially these countries struggled in the post-communist era to attract investment, when only the most speculative of investors ventured into a region which was overshadowed by economic and political instability. Even though land values were a fraction of the price of Western Europe – the risks were considerable.

Nowadays, Central and Eastern Europe is a very different region; a place of decreasing risk and higher rewards. EU accession, followed by NATO membership for much of the region has seen the emergence of a very different set of countries. These now established EU members have stringently observed and upheld the rule of law, as well as dramatically reducing the levels of corruption. They are a group of modern European countries with economies expanding upwards of 3% per year, an increasing number of English speakers and a culture where western influences are making sizeable inroads.

Operating returns from farming in CEE have grown over the last two decades; a result of more efficient and professional operations, better farming practices and higher subsidy pay-outs. This has brought the region’s standout countries: Poland, Romania, Latvia, Lithuania, Czech Republic, Slovakia and Bulgaria onto the radar of some the world’s largest pension and insurance funds.

Investment managers may query if there are the assets available to deploy the large amounts of capital allocated by institutional investors; these assets need to offer higher risk-adjusted returns than the more mature markets of the US, Canada, Australia and New Zealand. Whilst the region is characterised by a relatively immature brokerage sector, many excellent opportunities do now exist, including assets being exited by early stage institutional investors. This has been highlighted by the recent transaction in which the Swedish investment firm Kinnevik sold their 6,700 ha farming business in NE Poland for more than $46 million. The sale was handled by Terravost.

Some of the best farming assets in CEE are businesses which have been built over the last fifteen to twenty years, benefitting from western input but employing top quality local management teams that consistently deliver annual own and operate returns of 5 – 6%. Leasing returns are slightly lower, but the tenant market is becoming more sophisticated, especially as the farm sectors mature in countries such as Poland.

The real jewel in the crown is the potential for further land price appreciation. The blended return of capital appreciation and income yield cannot be overlooked, for it is significantly higher than what can be found in more developed markets. This is unlikely to change as CEE land values continue to converge with the EU-15. You need only look as far as Germany to see a microcosm of this convergence play happening. Germany was at the centre point of where “East met West” in 1989, and since the (Berlin) wall came down East German land prices have been catching up. Over the last 10 years prices have risen in the East by approximately 300%, whilst in the West the increase has been more modest at approximately 150%. Even now, 20 years since reunification, there is a significant gap in prices between the respective regions, with land prices in the East still as much as 20% lower than those in the West.

One of the world’s largest farmland investment groups has recently started considering CEE as an investment geography. Only time will tell if this will open the floodgates for more investment into the region. Institutions that are primarily incentivised by income returns from owning and leasing out farmland need to be aware that there are big gains to be made from future capital growth in CEE. The quality assets which are now available offer this type of investor the perfect opportunity to turn a profit in a region which offers low risks and high returns.

Carl Atkin is a member of the speaking faculty at GAI Europe in London, November 30-December 2, 2015.

The opinions expressed in this editorial are the authors’ own and do not reflect the views of GAI News.